Janet Yellen Doesn’t Mince Words and More on Her Testimony

Federal Reserve Chairwoman Janet Yellen tells the world to expect continuity in monetary policy in her first report to Congress since taking the helm. Here are five quick observations on her comments and on the report the Fed submitted to lawmakers:

The Federal Reserve building in Washington.

Reuters

JANET YELLEN DOESN’T MINCE WORDS: Ben Bernanke’s semi-annual testimony to Congress tended to range from eight to 12 pages of text. Janet Yellen clocks in with her first testimony at a little more than five pages of text. Her comments are direct in addressing pressing questions. Will she stick with the policies Mr. Bernanke authored? “Let me emphasize that I expect a great deal of continuity in the [Fed’s] approach to monetary policy.” Is she worried about recent turmoil in emerging markets? “Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.” The days of central bank obfuscation – mastered by former chairmen like Alan Greenspan — are clearly over.

JANET YELLEN IS A DOVE: We already knew this, but her testimony reinforces the view that Janet Yellen is a dove – meaning she leans toward easy money policies to address low inflation and high unemployment. Most notably, she is very focused on the weak job market, which she turns to on page one of her testimony. “The recovery in the labor market is far from complete,” she says. She is looking beyond a 6.6% jobless rate in making this assessment. “Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed,” she says, and “the number of people who are working part-time but would prefer a full-time job remains very high.”

ROADMAP FOR NEW FORWARD GUIDANCE, NO NEW THRESHOLDS: The Fed has been debating whether and how to shift its forward guidance for short-term interest rates. Since December 2012 officials have set two thresholds to guide their thinking on rate increases – a 6.5% unemployment rate and a 2.5% inflation rate. Either one, officials said back in December 2012, would trigger a discussion about raising interest rates. But as the jobless rate has fallen, officials have lost faith in that marker, in part because they think it masks broad pockets of weakness in the labor market, such as people who have left the labor force and the counts of unemployed, but might come back if the economy strengthens. Officials have considered lowering the jobless rate threshold to some lower level such as 6%. Ms. Yellen makes no mention of this idea, strongly suggesting the idea is going nowhere. Instead, she signals very clearly that once the jobless rate hits 6.5%, the Fed is going to be looking at a broader range of indicators in deciding when to start rate increases. Remember, Janet Yellen doesn’t mince words: “These observations underscore the importance of considering more than the unemployment rate when evaluating U.S. labor market conditions.”

FED DOESN’T ACCEPT BLAME FOR LATEST EMERGING MARKET SELLOFF: In a section in its official report to Congress, the Fed accepts that talk of pulling back on its bond-buying program last summer triggered stress in emerging markets. But officials don’t accept that the latest round of selling is due to the Fed. “Rather, a few adverse development – including a weaker-than-expected reading on Chinese manufacturing, a devaluation of the Argentine peso, and Turkey’s intervention to support its currency-triggered renewed turbulence in emerging markets, the Fed said. In her testimony, Ms. Yellen said this doesn’t yet look like a threat to the U.S. economy. But the Fed warns in its report that a number of emerging markets, “harbor significant economic and financial vulnerabilities.” An index of vulnerability presented in this report (Page 29) highlights Turkey, Brazil, India, Indonesia and South Africa as among the most vulnerable.

HOUSEHOLD WEALTH: Fed officials are encouraged by improvements in household wealth, particularly a recovery in the housing market. In its official report to Congress (page 13) they note the share of households with negative equity in their homes – meaning more debt than equity – has fallen to one in eight, compared to one in four two years ago. This, in turn, could make the Fed’s low interest rate policies more powerful. “Banks are more willing to refinance mortgages when homeowners have positive equity,” the report says.

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.